My A-Ha Moment: Accumulation

You might have noticed a bunch of A-Ha moments floating around last week as Shannon rocked her Financial Literacy Awareness project. But in typical J. Money fashion, I missed the boat so I’m blabbering about mine today :) And big shock – it has to do with my 401(k) account. (But I promise not to harp on it as much as I did last week, since I’m only permitted one harping per month).

Consider today’s post mainly about ACCUMULATION. It happens to use the vehicle of a 401(k) account, but keep your eyes glued strongly to the money parts of the article vs the tool. It’s the process of your cash growing over time that’s the important part here.

And it all started when…

J. Money’s balance doesn’t go down

A long long time ago, before the invention of blogs and twitter and even RateMyFace.com (okay, well not that long ago ;)), J’s father once multiple times told him that if there was just one financial thing he needed to do when he got his first “real” job, it was to invest in his 401(k) plan. “At least to the amount your employer will match” – he added over and over again. To which J. Money didn’t listen over and over again like a big fat dummy, until one day he wised up and gave in.

Every two weeks going forward, he’d see his anemic account get a little fatter and fatter – without ever missing any of that money, mind you – until one day he woke up and SHABAM! He had over$1,000in there! “Woahhhh $1,000! For almost doing nothing! I’m so rich!” – said an eager 20-something bachelor, realizing he was onto something incredibly magical.

It had been the first time any of his accounts didn’t go DOWN after being pumped full with a paycheck. An alluring feeling indeed, especially from someone so used to playing the Transfer Game at the end of every month (you know, when you don’t budget right and you have to keep xfering money from your savings back into your checking?)

“You mean to tell me I just leave it be, and over time it’ll keep going up? Until I’m old and gray and able to finally tap it in retirement?” J cautiously asked his father? “You got it… And who you calling old?” dad quipped back.

And true indeed, the money kept rising, and rising, and rising – without ever lifting a finger. Except to increase the %’s over time to smartly avoid lifestyle inflation.

The Rise of The Monies…

A couple of years later his balance hits$10,000 – “Holy shit! Do you know how many beers I can buy with that?” – this same bachelor exclaimed after a while of not checking.

Then a couple years after that,$25,000 – “Holy balls! This puppy’s growing!” – our same bachelor, now trying to curb his cursing whispers to his long-term girlfriend who will soon be ex-girlfriend (oops).

Then$50,000– “Rollin’ rollin’ rollin’….. keep them doggies rollin’!” – he shares with his new girlfriend, soon-to-be fiancée and mother of his future children.

Then it soars to $100,000 a little after that, having fully maxed out his 401(k) yearly realizing this would snowball the pot even faster! – “YES!! This is getting too easy!” – he exclaims to the L.A. Times, and his now bride to be.

And, finally it reaches$180,000. When our bachelor turned husband, turned future father, leaps to self-employment and shouts, “Boooooooo…. I’m not gotta get any of that free money anymore!!!” as he xfers out his 401(k) into Traditional IRA accounts and starts his ridiculous IRA test. Which he’s soon ending and rolling over to Vanguard to be a pimp like thousands (millions?) of other ballers wanting low fees and not trying to time the market (post on this coming soon)…

And J. money and his money live happily ever after… while both his family, and his net worth, continue to grow after realizing the power of never ever touching your money! A simple concept a 3 year old could master, yet it takes this guy 20-some years for it to finally sink in. Where he continues on the legacy by maxing out his Roth and SEP Iras every year going forward…

The moral of the 401(k) Story:

Your stash can only grow once it’s *started*. SO START IT NOW no matter what stage or age you’re at! It doesn’t have to be via 401(k) either, put it wherever you want as long as you KEEP DOING IT.

Automate it and make it easy while you’re out living your life. (And increase your savings rate as new money finds you over time to avoid that bitchy lifestyle inflation)

Never poke your grubby little hands in the pot!! It’ll continue to grow as long as you stay far far away and never take any out. I promise.

And lastly, always listen to your parents :) If they’re no good with money, then always listen to me.

// End A-Ha Moment

————You can see other bloggers’ A-Ha moments here, courtesy of Shannon from The Heavy Purse.

Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!

Such a great point though. I waited a year before starting my 401(k) and wish I had just started right away. No idea what I wasted the money on that first year, and it was 10 years ago… Imagine how much $$ that would be now and 30 years from now!

My parents aren’t very good with money so I didn’t get the best start and advice from them. However, I have started saving for my retirement, they automatically enrolled me at work and told me it’s for my future.

We do not have a 401k at my office so an IRA is the way to go for me…I wish I had started young. This is one of the many money lessons I am teaching my son. It’s shocking how much a small amount monthly can grow.

My single mother was never that great with money, but luckily I married a guy who was raised by very financially savvy parents and passed all that knowledge onto their son, who somehow managed to brilliantly reform spender-me into saver-me. Woohoo!! And I agree, it’s a ton of fun watching the money pot grow!!

I was lucky in that I majored in finance in college, so I knew the importance of starting investing right away. But I had friends that would ignore me for years about investing and it would kill me that they weren’t taking advantage of compounding and time. For anyone reading this, the sooner you start, the less you have to save! If you can just save $20 a paycheck (who can’t afford that?) that is all you need. Of course, the more you can save the better, but when you are young, you can get away with saving a small amount and still watch it grow into something sizable.

LOL, funny, J$, but an awesomely good story. The one thing that keeps us from not totally giving up on our debt freedom journey is that we’ve got that ever-growing 401k cash to hook us up in retirement. :-)

I wish we would’ve started saving sooner, but we didn’t start saving for retirement until our late 20’s. I feel like we’re making up for it now but it’s still frustrating. I love watching my Vanguard balances grow over time. =)

That was actually my ah-ha moment last month! I realized when I do my net worth updates, the only time I make real progress is when money goes right into my 401(k) and IRA. Nothing else has the same effect.

…then I checked my actual contributions to my IRA vs. what it’s worth and felt really good about life and compound interest and making smart financial decisions.

Ha! I was like, “wait weren’t the A-Ha moments due last week?” What a great way to set yourself apart from the pack. :-) I definitely agree on the automation of saving, but that you can also achieve similar results in a non-retirement account (without the pre-tax benefits). Sometimes people under 40 put too much into retirement and have large retirement accounts but also large debts because they didn’t have access to money to pay for things like a home and children. The best feature of the 401k is the automation factor, and you truly just have to do it and not think about it, and it’s amazing what can happen.

Instead of advice from my Dad I was ignoring, I was ignoring those charts given to you in 401k packets showing what happens when people start early as opposed to later with their investing. Boy, I wish I could go back and smack my younger self silly and wise up but glad we’re doing our best to make up for it. Gotta love having SEPs to max out. :)

Great story! My dad also encouraged me to invest in an IRA and my 401K…fortunately I listened. Shoot he encouraged me to invest even as a kid and bought me a Nintendo game called “Wall Street Kid” where you invest in the stock market! The other kids thought that game was lame, but I liked it. I love the “Rise of the Monies.” At first the account isn’t too impressive, but once you get some money in their it really picks up steam, especially when the stock market is cooperating.

When our son graduated from college and got his career started, we sat down with him as he chose his employee benefits. The first thing we had him do is sign up the 401K and pension at his company. (They offered and he was allowed both). So when he got his first paycheck, his contributions were already taken out. He never even saw one paycheck with more money due to signing up later rather than immediately. So from day one, he never missed the money. One of the 4 pieces of advice I’ve given him as an adult. I think he followed all four. Smart guy!!

I sent money to my 401k when I was straight out of college – because that company had a match, but then I had a 8 years with no match, so I didn’t save! Now I’m playing (aggressive) catch up. Hubs is self-employed, so his retirement is not automated (and his income is inconsistent). It’s really hard for him to put $$ in his retirement account as often as would be preferable. It drives me bonkers!

Yeah, that’s a tough one for sure. I end up waiting till the end of the year after taxes are done to then make my 1st deposit for retirement (SEP ira). I wish I could do it every two weeks, but dropping in one big chunk feels pretty good too. And then I don’t have to worry about putting in too little or too much since the amount is based on profits for that year which is how the SEP is set up.

Both spouse and I had 401K’s, both had matching funds, both of us experienced financial disasters (job loss, state income taxes, federal income taxes, medical expenses, loss of medical insurance, etc.) of one kind or another over the past 32 years that caused us to rationalize dipping into them (the old “well, at least we had the money to take from” analogy).

I didn’t realize how much, or how often, until I recently went through 32 years of filing and shredded everything not current and/or important. I came across several withdrawals, over several years, reflecting a consistent habit of overspending and then using retirement assets to “start over,” over and over again.

Fortunately, we still have a healthy balance, and some of the funds withdrawn were used for our home, which has appreciated substantially as a result (thanks to crazy Silicon Valley property values), so all is not lost, but if I could say one thing to anyone out there with regard to this issue, it would be this:

Put away as much as you possibly can, with or without employer matching, and NEVER (as in under no circumstances) pull the money out thinking you’ll make up for it later. Chances are you never will, and the day will come when you’ll look back on the withdrawals as one of the biggest financial failures of your life.

That’s a tough lesson to learn for sure :( But good for you guys for plowing money in there still after all those years! And honestly, sometimes you gotta do stuff you don’t want when life throws you a crazy curve ball. The nice thing with employer matches is that it’ll cover the sting of any penalties for pulling it out early too if need be. Which is something :)

I once had a friend who was putting it all in to get the matches, and then the next year taking it all out to pay off his entire debts owed. Figuring that the penalty for doing it would still be MUCH better than just paying his debts off the normal way. Esp since he had crazy high c/c interest rates. I wouldn’t have the balls to do that myself, but he considered it a pretty good hack. And said he’d never have invested into the 401k anyways because of his debt, so he didn’t feel too bad for doing so… I just hope he since got a good taste of it to jump back in and keep going – now that he can put in more w/out worrying about debts! :)

Every Job Ive had I always contributed to the 401K, as a finance major it was a no brainer, as a natural saver it was a high seeing money get deposited every check. A Ha should have been No Duh, J. Money.

Good one J! I remember when my parents kept telling me to invest in a 401K, but also open a Roth. I just told them that I would, but never did. What an idiot! Now, I have both and love seeing that money grow.

Yeap, it’s great to see my retirement fund grow every year. Of course, it went down during the financial crisis,but it was temporary. After a few cycles like that, I know it will recover (most likely.) Now I just concentrate on adding to it. It’ll be fun to finally withdraw when we’re 65. :)

Yeah, well luckily you were doing some major dollar cost averaging automatically by picking up more shares throughout the downturn! So in a way that was also pretty sweet :) Just not for those no longer investing and already retired :(

I am dealing with a family member who couldn’t keep his grubby hands out of the 401k pot. It is bad news bears, man. Your advice is spot on for any worker with a 401k. The match is nice and all, but even if there’s no match the tax savings alone, especially for single and/or high income workers, makes it a no-brainer.

Yup! The tax break is good even on its own. Though you could also do the IRA route too for the same if you want better places to put that money. That’s the only prob usually with 401ks – not as many good options sometimes. But probably good they limit it or else people would have *too many* decisions and never start! Which is another reason I love when employers automatically enroll their people into the plan… You have to go out of your way to change it and most lazy people won’t :) Hopefully the automatic place they invest it isn’t a crazy one!

I didn’t know about the power of compound interest until recently. I was so uneducated about my finances that it wasn’t even funny. But I decided to take control and have been on track for the past year. Started kind of late (33 years old) but I started and now I can’t stop.
Love this blog. Keep up the good work.

I literally laughed out loud when you hit the self-employment part of your story. I, too, miss the free matching money that used to flow into my 401k. But now we have Roth IRA’s to fully fund and rental property to buy. :-)

I’m confused. Your 401k will only go up *if* the investments don’t go down. When I first started contributing to my 401k, the market was still in decline and there was a period where the balance of my 401k was less than the sum of my contributions. Maybe we’ve forgotten, since the stock market has done so well for the past few years, but all investments do not go up all the time. It seems like maybe you’re implying more than you’re saying, such as “your investments will grow if you do not take any out AND weather the inevitable temporary declines.” Right?

Yes and no. If you get matched free money your pile should pretty much ALWAYS go up even if the market goes down. Just based on the match alone (esp if you put in to the point you’re getting 100% matches, and if your company participates in that). If you have no match whatsoever, then yes – the market will have to be higher by the time you retire and take it out in order for it to grow. But the odds are really really REALLY good that that will be the case :) And it also depends on how your money’s invested too. If you go the more conservative route w/ bonds or money markets etc then you don’t have to worry about that part at least – just that it won’t grow very high. But again, you’re putting in money every two weeks either way so that alone is piling it up fast too. And when the market is down, you’re also getting stocks/funds/etc at lower prices! So if you believe they’re going to go up some day, you’re going to be even better off than starting at a higher point. So kinda good either way you look at it, at least to me. If anyone’s not comfortable investing in the stock market, I’d recommend investing in other places they are more comfortable with. Cuz no investing at all, into anything, is just bonkers.

Hey J, thanks for this post, I really needed to hear this today after a dilemma I have been having this weekend, on my blog posts I am attempting to get a free car, (A Fiat Panda Sisley 4 x 4 no less!!) and my dilemma has been whether to use some of my savings money to get further with some of my short term projects, such as building a large hut and a wooden double garage from scratch (I will be blogging about these soon)

Great explanation for how the 401k works. Here is how I once described a 401k to a financially illiterate friend of mine. ” If you don’t contribute up to the matching amount of your 401k you will be poor forever. If contribute up to the matching amount of your 401k and leave it in there you will be poor until you retire. “

Thanks for joining the movement! I love your money a-ha because it’s so simple and one so many people miss. It’s really a shame that so few people realize what a 401k even is or why they should care. And this is why – “Your stash can only grow once it’s *started*. SO START IT NOW no matter what stage or age you’re at! It doesn’t have to be via 401(k) either, put it wherever you want as long as you KEEP DOING IT.” I can’t even count how many times people have told me they regretted waiting to invest in their 401k. I always hate to tell them how much money they lost because they waited and how much of difference that money could have made. Thanks for your support of The Financial Literacy Awareness Carnival and helping spread the word!

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